Of course, any time you acknowledge the possibility that something startling might happen in the future, you get shelled by people who have a vested interest in that thing not happening—in this case, people who are short Apple's stock or don't own Apple's stock.

These people howl in rage at your "hype" or smugly assert that you are a moron. And then they throw out a litany of reasons why what you said might happen, might not happen.

But, still, it's worth thinking in detail about what would have to happen for Apple to get to $1 trillion, as well as why that might not happen.

WHAT HAS TO HAPPEN FOR APPLE TO GET TO $1 TRILLION

Unless Apple's stock just gets caught up by a wave of euphoria, Apple's future stock appreciation will have to be driven by fundamentals—namely, earnings and cash flow. For simplicity's sake, let's use earnings.

Apple earned about $32 billion last year.

At a $500 billion valuation, the stock is trading at about 15X those earnings.

If Apple's earnings multiple (P/E ratio) stays the same, which is not a given, Apple's earnings will have to double for the company's value to hit $1 trillion.

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Specifically, Apple will have to earn about $65 billion in a year.

How much is $65 billion?

A lot.

It is more, I think, than Apple has made in its entire history (up to last year). It's more than twice as much as Exxon-Mobil made last year. It's about 3-times as much as Microsoft made last year. It's 10-times as much as Cisco made last year. It's 15-times as much as JP Morgan made last year. It's 20-times as much as Walmart made last year.

In fact, as far as I know, it's more than any company has ever made in a year in history, even after adjusting for inflation. (Maybe Rockefeller's monopoly Standard Oil made that much. I don't know.)

Of course, no other company that I am aware of has made $32 billion in a year, either, the way Apple did last year. So Apple is already in uncharted territory.

If Apple's profit margin stays the same (a big "if"), to earn $65 billion, Apple will have to double its revenue.

Apple generated a staggering $125 billion of revenue last year, so doubling revenue would mean generating $250 billion of revenue.

That is an extraordinary amount of revenue.

But, unlike Apple's earnings, it's not an unprecedented amount of revenue. Walmart generated more than $400 billion of revenue last year—by selling everything to everyone, from food to clothes to iPads to guns to lawn mowers. So companies can, sometimes, get that big.

Of course, Apple doesn't sell everything to everyone. It only sells one thing: electronic gadgets. And it doesn't sell them to "everyone" because Apple charges premium prices—and because there is still a hierarchy of needs, and people can't eat iPads. Yet.

So, Apple getting to $250 billion of revenue would be far more extraordinary than Walmart getting to $400 billion of revenue. (Though not much more extraordinary than Apple getting to the $125 billion of revenue it already has).

On the other hand, for Apple to get to $250 billion of revenue, it would only have to sell twice as many Macs, iPhones, and iPads as it sold last year.

Mac sales are growing much faster than PC sales, so it doesn't seem unreasonable to think that Mac sales could double.

iPhone sales are growing extremely rapidly along with the smartphone market, and there are about 5 billion "dumbphones" that will soon be replaced with smartphones. So it doesn't seem unreasonable to think that Apple could soon sell twice as many iPhones as it sold last year.

iPad sales are going through the roof, and Apple pretty much owns the tablet market. So it seems a lay-up to think that iPad sales are going to double over the next few years.

And then there's the TV business, which Apple is expected to enter later this year. That's a huge business, too.

So, it actually seems reasonable to think that Apple could double its revenue over the next few years.

And that leaves profit margins.

The most extraordinary aspect of Apple's business right now is not its revenue growth, which is plenty extraordinary. It's its profit margin.

It's mind-blowing because hardware companies just don't have profit margins like that. Even software companies don't usually have profit margins like that.

The hardware business is generally a cut-throat commodity business with razor-thin profit margins.

Dell, for example, which used to be considered a talented hardware manufacturer, has a 4 percent profit margin. HP, which sells hardware and software, has a 6 percent margin. IBM, which sells hardware, software, and services, has a 15 percent margin.

So you can understand why Apple's profit margin is mind-blowing.

And—here's the important point—Apple's mind-blowing profit margin may well be a temporary aberration.

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If free market capitalism works the way it has in the past, competitors will gradually eat into Apple's humongous profit margin.

Right now, people are willing to pay a premium for Apple products, and Apple's manufacturing processes are more efficient than those of its competitors.

But Apple's competitors should continue to improve. And as Apple's competitors get better and more efficient, Apple's ability to charge such a premium for its products may fade.

Or Apple may be forced to pay its Chinese manufacturers more. Or, as Apple moves more and more mass-market, it may have to cut prices just to make its products more affordable for regular people (Walmart shoppers, for example). Or Google's Android might become the dominant mobile platform, destroying the huge "network effect" advantage Apple currently has with apps and developers. Or Apple's margins on its TV product may be much lower than its profits on its iPhones and iPads. And so on.

The bottom line is that, for any of a dozen reasons, Apple's profit margin may shrink to more normal levels.

And if Apple's profit margin shrinks, Apple will have to generate more revenue to earn the $65 billion of net income it will need to become a $1 trillion company.

If Apple's profit margin shrinks to, say, 15 percent, for example, which would still be vastly higher than Dell and HP and on a par with IBM, Apple would have to generate $400+ billion of revenue to earn $65 billion. That's how much revenue Walmart generated last year.

Then, lastly, there's the earnings multiple—the price investors are willing to pay for a dollar of Apple's earnings.

Right now, Apple trades at a 15X earnings multiple (based on last year's earnings).

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Comments

The Bleachers

Your ignorant posts use to anger me until I figured out that the only thing you care about is your clicks and you actually have no loyalty to any value or anything in general but your own personal GREED.